BGIE Russia 3/24/11

1. Compare the crises of 1998 and 2008. How were they similar? How were they different?
  * Crises Correlate to Sharp Drop in Oil Price- Quick fall of the economy was due to high dependence on commodity/oil export prices.   Steep decline in oil prices (Exhibit 7) hurt Russia which increasingly derives most of its exports (Exhibit A-1) and tax revenues (Exhibit 5a, 2008) from natural resources.
  * Internally Caused by Weak Government- Government’s inability to successfully enforce revenue policies was due to lack of administrative capacity to collect, trading tax concessions for political acquiescence, tax evasions by individuals, and “loans for shares” giving rise to powerful oligarchs who lobbied against tax reform.   Lack of revenue caused government to issue high yielding (~150%) bonds, leading to a viscous cycle ending in ultimate default.
  * Lack of Political Will and Resources to Develop Response Plan- Response to crisis was announcing default on domestic debt, devaluation of ruble and stalling of foreign debt repayment.   Weak state and government leader did not have resources (federal revenue or reserves) to implement a policy (Exhibit 3)
  * Externally Caused by Global Financial Crisis- Began with the liquidity crunch in U.S. and worldwide recession.
  * Private Sector’s Large Accumulation of Foreign Debt- Represents 28% of GDP compared to only 4% in 1998 (Exhibit3).   This opens to the new threat of takeover by foreign lenders.
  * Comprehensive Response Plan by Government- Pro-active intervention which involved injecting liquidity to major sectors, raising interest rates to fight inflation, and managing gradual depreciation of ruble.
  * Stabilization Fund- In 2008, government able to draw $215B from fund to which budget surpluses due to soaring oil prices were channeled.   This was used to finance the anticrisis plan of direct subsidies, export tariff reductions, refinancing...